Friday, July 31, 2015

Ruling of the Week 2015.22: Beam Me Up

I see we are close to perfecting the Star Fleet-style impulse engine. It also appears that we are working on teleportation, one atom at a time. That got me wondering what Star Trek inspired devices might have been the subject of a Customs classification ruling. What I found is the Star Trek Flash Badge imported by the Kellogg Company to be included as a prize in boxes of cereal.

The plastic badges mimic the Star Fleet divisional insignia for Command, Engineering and Science plus insignia of the Klingon and Romulan Empires. Each badge contains a battery. switch and an LED. When the switch is depressed, the LED lights, illuminating the badge. According to Customs, the badges could not be worn and lacked any kind of pin to connect it to a uniform. Customs also noted that their entertainment value outweighed any utility.

Here's the interesting part. The badges were imported in bulk and then sent to cereal packaging plants to be inserted in boxes. The badges were not individually marked with their country of origin.

Let me stop here for a few observations. This ruling is from 2008 and these look to be J.J. Abrams-era badges. Here is the whole set, with a four-fingered Tony the Tiger Vulcan salute:

Here is another image of the whole set:

Of course, we should let our Geek Flag fly a little and mention that in the era during which recent Academy graduate James T. Kirk had command of the U.S.S. Enterprise (NCC-1701), the insignia was nothing more than part of the uniform. Its only function was to identify the wearer as being assigned to Command, Science, or Operations (which includes Engineering as well as Security). If you were unlucky enough to be assigned to a red-shirted job in Security, you were likely to be killed off without so much as a screen credit.

I'm concerned about this because these badges are "functional" in that they light up. That seems to indicate that they are mimicking some function in the original of which they are a model. That would lead to the conclusion that Kellogg's had somehow crossed the timeline and put a communicator badge of the sort used 80 years later on the NCC-1701-D by Captain Jean-Luc Picard and his crew into the context of a young Captain Kirk. Of course, the Picard-era badges did not light up, but let's put that aside.

There are a number of ways this may have happened. An easy hypothesis is that Q somehow sent them to Kellogg in 2008. This is contrary to the facts of the ruling, which state that the badges were made in China. Another possibility is that a member of the NCC-1701-D crew stumbled through a Guardian of Forever portal, thereby making a Next Generation communicator available to the reboot crew to be used by J.J. Abrams and Kellogg. I suspect that it the correct answer.

Because the badges were primarily articles of amusement, rather than actual communication devices, Customs classified them in HTSUS item 9503.00.00 as other toys, which are duty free.

But, what about the marking? In the ruling, Customs and Border Protection tells Kellogg that the badges are not properly marked with their country of origin. Do we agree with that? One might argue that if Kellogg is the purchaser and the outermost container that reaches Kellogg is marked "Made in China," which I am assuming it was, isn't that enough? After all, is the average cereal buying American concerned about the country of origin of the free toy included in the box?

That, however, is not the correct analysis. The prime directive of marking law [see what I did there?] is that every article of foreign origin must be marked with its country of origin in a conspicuous, legible, and permanent manner so as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin. 19 CFR 134.11. Who is the ultimate purchaser of a free give-away? This ruling does not provide much analysis, but Customs has consistently held that it is the recipient, not the purchaser. For example, little shampoo bottles given to hotel guests must be marked with their country of origin. Umbrellas given to race track patrons also much be marked with their country of origin. So, Customs did Kellogg a favor and pointed this out.

I don't want to tread too far into the jurisdiction of Law and the Multiverse, but I do wonder about customs formalities in the 24th century. I don't ever recall hearing about the Enterprise transmitting a cargo manifest for review by local authorities. Nor do I recall hearing anything about duties being paid. Is that because Star Fleet is essentially a military operation? Keep in mind that much of the machinations of the Star Wars universe is driven by trade regulations. I suspect Lando Calrissian is all over the Cloud City customs regulations.

I feel like there is a future article in the application of customs law to Star Fleet and the Star Wars universe, but that will have to wait.

In the meantime, if you are a fan who enjoys a detailed rehash of all things Star Trek including an analysis of the morals, messages, and meaning of each episode, check out the Mission Log podcast. It makes Thursday my favorite commute into work (excluding days I ride).

Thursday, July 30, 2015

There is a Trial on the Horizon

Penalty cases are abundant these days.

In United States v. Horizon Products International, Inc., the government is seeking $394,794 in unpaid duties and penalties plus interest. The imported merchandise is plywood and the underlying issue is whether the wood was properly classified. Horizon conceded that the merchandise was misclassified and that it owes about $70,000 in unpaid duties. The issue is the remaining penalties and interest.

Regarding the pre-judgment interest on unpaid duties, the Court has the discretion to order or not order the payment of pre-judgment interest, which is intended to compensate the United States for the loss of the duties over time prior to payment. When deciding whether to award pre-judgment interest, the Court is supposed to provide full compensation while also considering several factors including:

  • The degree of personal wrongdoing on the part of the defendant
  • The availability of alternative investment opportunities for the plaintiff (i.e., the United States)
  • Whether the plaintiff delayed in bringing the action to recover the duties
  • Other considerations of fundamental fairness
 Here, the Court found no unreasonable delay by the United States and that the importer has not paid the outstanding duties. Thus, the Court ordered that Horizon pay prejudgment interest. I do have to wonder about the alternative investment opportunities. That factor essentially asks whether the U.S. would have done something useful or profitable with the money. I don't want to sound cynical, but I think that probably cuts against the U.S. getting interest, but that is just me.

Regarding the penalty amount, Horizon conceded the misclassification. That means there was a material false statement on the entry documents. My experience is that Customs and Border Protection will generally assume that means there was negligence or worse. That makes sense since the law puts the burden on the importer to show that it was not negligent. That's what this case is all about and why it is interesting. Horizon contends that there is an open question of fact as to whether it exercised reasonable care in making the entries.

What evidence does Horizon have that it exercised reasonable care? To start with, it used a reputable customs broker. Congress identified this as evidence of reasonable care in the legislative history to the Customs Modernization Act, but it is not a 100% defense.The government contends that Horizon has not shown this it actually worked with the broker in a "good faith effort" to ascertain the correct classification.

There are some records of communication with the broker in the form of faxes. [Side note: these entries are from 2006 and 2007, well past my presumed date of extinction for fax machines.] The faxes, according to the Court, "raise more questions than they answer . . . ."

The Court then makes a well received (by me) observation (the emphasis is mine):

The Government would like the court to infer that all the responsibility for the erroneous entries rests on the shoulders of Horizon, but the court could just as easily infer that the customs broker shares a portion (if not all) of the responsibility. Customs brokers, after all, have statutory and regulatory responsibilities to classify merchandise correctly. E.g., 19 C.F.R. § 111.29 (requiring customs brokers to “exercise due diligence . . . in preparing or assisting in the preparation and filing of records relating to any customs business matter”); see also 19 C.F.R. § 152.11 (“Merchandise shall be classified in accordance with the [HTSUS] . . . .”); 19 U.S.C. § 1641(d) (allowing Customs to penalize a broker who “has violated any provision of any law enforced by [Customs] or the rules or regulations issued under any such provision”); United States v. Santos, 36 CIT ___, ___, 883 F. Supp. 2d 1322, 1327-30 (2012) (sustaining as reasonable a § 1641 penalty on a motion for default judgment against broker who allegedly misclassified imported goods).

This is important. It shows an understanding by the Court that it can be reasonable for an importer to rely on a broker for classification advice. But, the facts matter. We need to know the relative involvement of the broker and the importer in the decision, the reasonableness of the broker's advice, and other factors that might indicate that the importer acted reasonably. The Court is wisely saying that where reliance on a broker is raised as evidence of reasonable care, it needs to look at the whole picture. It is not enough for CBP or the broker to fall back on the old saw that "the importer is ultimately responsible for the entry."

The Court, therefore, found a genuine issue of material fact in dispute. That means the case is not appropriate for summary judgment. It will, therefore, need to go to a trial if it is not settled.

There are two other issues worth a mention. First, Horizon made the argument that it should be excused from the penalty under the Small Business Regulatory Enforcement Fairness Act. This is a useful tool for small businesses that face a civil administrative penalty despite having acted in good faith. It does not apply here because Horizon has not paid the duties owed.

The last point is whether the Court should mitigate the penalty below the demand by Customs. That involves a detailed analysis of the "Complex Machine Works" factors. These are 14 factors the Court is to consider when reviewing the amount of a penalty previously imposed by Customs. This is another reason why this case is not ready for summary judgment.

It appears that Horizon and the U.S. government are going to be squaring off in court soon.

Wednesday, July 29, 2015

Tell the ABA to show me some love

The ABA publishes an annual list of its top 100 legal blogs (or "blawgs"). If you read this blog and find it useful, please let the ABA know via their nomination form.

Thank you. That ends our commercial message.

Tuesday, July 28, 2015

More on Zombies

I got a nice shout out from Law and the Multiverse today. The post is about a law review article on using zombies as teaching tools in law school. Read the post and then read the full article.

Monday, July 27, 2015

Nominative Trademark Fair Use

Customs seized some televisions at the Port of Miami. The reason was an apparent counterfeiting of the trademarks HDMI and MHL, both of which are interface connections. You have probably seen HDMI cables and connectors. They look like big USB connectors and are present on may modern televisions, computers, and game consoles. MHL is the standard for Mobile High-Definition Link, which is a new standard designed to connect small devices such as smart phones to larger HD monitors. With an MHL connection, you can use your smartphone to stream content to your TV, which is a cool thing that can now be done via Chromecast or Miracast.

I don't usually write about simple seizures, but this one and similar seizures bug me.

Customs and Border Protection is in the habit of seizing electronics that identify electronic ports by type. For example, where a tablet has a USB port and labels it as such, CBP requires that the producer have a license to use the USB label, which is a registered trademark of the folks at the USB Implementers Forum, Inc. If the unit or the packaging has any of the familiar USB logos on it, CBP is entirely in the right to do so. Same goes for HDMI, MHL, DVD, and other standards that are associated with registered trademarks.

But, what if the unit or the box simply uses the letters HDMI to identify the port into which a compatible HDMI cable is to be inserted? What if the box says "4 HDMI ports" without ever using a trademarked logo associated with HDMI?

One might argue that because HDMI, USB, and similar designations are "word marks," any unauthorized use of the word is trademark infringement. That, however, would be wrong.

The point of a trademark is to ensure that the consumer knows the source of the product. If you buy shoes bearing a Nike swoosh, those shoes should come from Nike. Same goes for a Xerox machine, Hershey bar, Dell computer, and any other trademark. But sometimes, the use of the trademark is not to identify source and no consumer would be confused by its use. A computer service business would not be infringing if it stated that it is able to repair Dell computers. That is a description of a service, not an indication that Dell is the source of the service. Of course, that business could go too far and make a confusing claim indicating an actual affiliation with Dell.

In trademark law, there is a concept known as "nominative fair use." Nominative fair use is a limited exception to the exclusive rights of the trademark owner. It allows third parties to use the trademark to describe the product or service without indicating that the user is the origin of the product or service. This is both fair and necessary. It is fair because it does not interfere with the trademark owner's exclusive use of the mark as a designation of origin. It is also fair because it prevents the trademark owner from monopolizing a product category by making it impossible for anyone else to describe a similar or compatible product.

In some cases, it is necessary to allow a third party to describe something using a trademarked word or phrase. The alternatives would be too unwieldy. Assume, for example, that the standard sizing for batteries were subject to trademark (for all I know, it might be). If you make a flashlight that requires two AA batteries, how would you convey that to purchasers without using the AA designation? You could say: "This flashlight requires two 1.5v alkaline batteries that are 1 3/4 inches in length, and 1/2-inch diameter cylinders, with positive and negative poles at each end." That won't work and that is why we have nominative trademark fair use.

The courts have recognized this exception for some time. Customs and Border Protection has also recognized it. See HQ 472729 (Sep. 26, 2002). The concept does not seem to have trickled down to the ports.

Just to be clear, this particular seized merchandise may have been improperly festooned with HDMI logos and MHL logos without authorization from the trademark holders. In that case, CBP did its job properly. If, on the other hand, the use is consistent with nominative fair use, CBP should release the merchandise and increase the training for its personnel on this topic.

Also, I don't want anyone to think I am advocating that it import products containing HDMI, USB, MHL or similar connectivity without the manufacturer having a license to that technology. Doing so is very likely patent infringement and that raises different and very expensive problems. But, CBP does not enforce patents at the border without an exclusion order from the International Trade Commission or a federal court. Hardware and software should be properly licensed.

The only issue here is the use of descriptive labels in a nominative sense. That is a narrow exception to trademark law that needs to be better understood.

Thursday, July 23, 2015

Ruling of the Week 2015.21: Coconut Wraps

Is there still a trend surrounding eating raw to allegedly preserve nutrients and avoid bad karma? I never understood it, nor do I believe there is any science behind it. I remember seeing a woman on a news show talking about how the enzymes in fruit dissolve unhealthy body fat, but she could not identify the enzymes or explain the mechanism. If you tell me you are on a juice cleanse, I will do my best not to scoff.

If, however, you are looking for a raw alternative to an otherwise delicious tortilla, you might try a "Pure Wrap," which is composed mainly of coconut meat that has been pulverized into a slurry and dehydrated into flat wraps. According to the folks at the company:

Pure Wraps believes that food is medicine and illness begins with nutritional deficiencies. In order to support wellness and fight disease we need clean food from a clean environment. Therefore, we are committed to unlocking the value of food by combining the ancient wisdom about nourishment with nutrient-rich ingredients and safe preparation techniques.

So much for the germ theory. Ancient wisdom also said that we get sick when our vital humors are out of whack. I'm not interesting in getting my bile and phlegm adjusted next time I get the flu.

But, what I am interested in the tariff classification of these sheets of coconut. There are two flavors at issue: plain and curry.

The first issue is whether the additional of salt at about 33 mg per gram of product is sufficient to kick it out of HTSUS Heading 0801, which is the eo nomine heading for coconuts. Note 3 to Chapter 8 permits the additional of materials for preservation or stabilization, provided the product retains its character as dried coconut. 

According to Customs' laboratory, the amount of salt added to the coconut was above the amount necessary for preservation and stabilization. Consequently, it is a flavoring. That is sufficient to push the product into Heading 2008 ("fruits, nuts, and other edible parts of plants, otherwise prepared or preserved . . . .).

The plain wraps are classifiable in 2008.19.15 as coconuts not elsewhere specified or included.

That leaves the curry wraps. The added spices include products of seeds or nuts. If they matter, then the product can't be coconuts. It would be "Other, including mixtures" in HTSUS item 2008.19.85. This is the interesting part.

It occasionally happens that a product is mixed or adulterated with other material in a way that might change its tariff classification. The question is whether there is some lower limit at which the additional material does not impact classification. Yes, there is. It is the de minimis level. 

Here, Customs found that the curry spices were merely incidental or immaterial to the overall product. While they do impart flavor, the nature and use of the product remains the same. Also, the value is not changed. As such, Customs treated the additional materials as de minimis and applied the same classification.

GSP Renewal Update

This may be my shortest post ever. Want your GSP refunds? The information you seek is here and here.

Friday, July 17, 2015

Tyco Re-Ignited

After having failed to convince the Court of International Trade that it had all the facts necessary to classify liquid-filled glass bulbs, Tyco is back. This time, the Court found that it had all the information needed to resolve the case. Unfortunately, Tyco did not get the result it wanted.

This case involves the liquid-filled glass bulbs you often see in fire sprinkler systems. In the event of a fire, the liquid gets hot. As it heats up, it expands. If it gets hot enough, it shatters the glass. This is useful, because the glass was holding closed a valve. Once the glass is gone and the valve opens, water sprays on the fire. A similar arrangement is used as a safety device in water heaters.

The legal question here is whether these bulbs are parts of sprinklers and water heaters in Chapter 84 or as articles of glass in Chapter 70. Tyco is arguing for Chapter 84. The problem for Tyco is that Chapter 84 includes Note 1(c), which excludes parts made of glass. To get around this limitation, Tyco argued that although the bulbs are partially of glass, they are not articles of glass because the glass is a "static" element and the liquid component is the "dynamic" element in this mechanical arrangement.

The Court of International Trade disagreed. Looking to the Explanatory Notes to Chapter 84, the Court found that the bulbs would not be "of glass" if the glass were combined with a "high proportion" of other materials or with "mechanical components" of other materials, such as a motor or pump. It turns out that the fluid in these bulbs in about 16% to 31% by weight of the total. The history of the "high proportion" language is that it relates to a similar note in Chapter 90, which was interpreted to mean that the item is "mainly" of other materials. Because the bulbs are mainly glass, the are excluded from Chapter 84.

The Court also held that the liquid is not "mechanical" within the meaning of the Note. This is a tougher call (if you ask me, which you did not). The expansion of the liquid creates physical, mechanical pressure on the glass. It is the dynamic element. The glass stands there static until it breaks. The Court did not find that similar to a motor or pump, but acknowledged that those are just examples of what might be considered mechanical. What if these devices were slightly less elegant and slightly more Rube Goldberg? If the fluid were replaced with a metal bar or spring, would the result change? It would certainly be more "mechanical," but also probably more expensive and no more effective.

Having excluded the bulbs from Chapter 84, the Court moved on to confirm the correct classification. Based on the relative values and weights, the Court found that the essential character of the bulbs is imparted by the glass. Both the glass and the liquid play a similar role in function, so that was a wash. That leaves the correct classification as 7020.00.60, which is a win for the United States.

Thursday, July 16, 2015

Ruling of The Week 2015.20: Malt Beverages

This one is for Lando Calrissian and his doppelganger Billy Dee Williams. It has to do with the tariff treatment of malt beverages and whether they are, in fact, beer.The ruling is H243087 (Jan. 13, 2015).

The beverages at issue are "Green Apple Sparkletini Italian Spumante" and similar products in raspberry and peach varieties. There is also a "Verdi Spumante." The obvious question is, "In what analysis is spumante beer?"

Maybe in this case. The beverages are made from a mash of malted barley and non-malted cereals plus hops. That mixture is "wort," which is then mixed with brewer's yeast and allowed to ferment. So far, that sounds like beer to me.

Hat tip to my local favorite

But, the base is then filtered to remove color and aroma (two of the best parts of beer). This produces a clear base to which natural flavors in the form of "wine base" and sugar are added. We now have something that sounds a lot more like the Bartles & Jaymes of my youth and not the craft beer of my middle age.

The classification dispute here is between Heading 2203, "Beer made from malt," and Heading 2206, "Other fermented beverages and mixtures of fermented beverages and non-alcoholic beverages, not elsewhere specified or included." The importer claimed that the merchandise should be classified as beer based, in part, on the regulations of the Alcohol and Tobacco Tax and Trade Bureau. The TTB allows for beer to be flavored provided the flavoring does not exceed 49% of the alcohol content of the finished product. For labeling purposes, the TTB classified these products as flavored malt beverages, which might make Billy Dee Williams happy.

In its analysis, Customs and Border Protection starts from the correct premise that it and the TTB are doing different things. The collection of federal excise taxes on alcohol is not guidance for tariff classification under the HTSUS.

"Beer made from malt" is an eo nomine classification that includes all forms of the product (unless there is indication of a contrary intent). Looking at the Explanatory Notes, Customs found that beer is obtained from fermenting wort prepared from malted barley or wheat, water, and (usually) hops. Flavoring may be added during fermentation and other substances (e.g., color and sugar) can also be added.

Here, the flavoring is added after fermentation and after the beer base has been filtered. But, because other substances can be added after fermentation without precluding classification as beer, Customs says the issue is not yet resolved.

What does resolve the issue is the fact that this is allegedly spumante (i.e., Italian sparkling wine). It is packaged in large bottles with corks and colorful labels. According to Customs and Border Protection:

The instant spumante beverages are distinct from beer because they do not have the taste, aroma, character or appearance of beer.  The beverage base is filtered after fermentation to remove the color and aroma—and consequently, any trace of “beer” characteristics or flavor—from the final product.  Furthermore, approximately 40% of the total alcohol content of the finished product is derived from the wine base.  The instant products are altered during the manufacturing process via filtering and the addition of wine base so as to fundamentally change their character; the finished products are no longer “beer”, or even flavored beer, within the scope of heading 2203, HTSUS. 

In addition to the physical nature of the product, Customs noted that the product is not marketed as wine and that some retailers stock it alongside wine. For this, CBP made the interesting decision to rely on website information to reflect real world marketing. At some point, that will be an issue.

Malt beverage-based spumante is, perhaps not surprisingly, not beer for tariff purposes. At least not for tariff classification purposes.

Saturday, July 04, 2015

Attorney's Fees for White Sauce Importer

Is this the final conclusion of the International Custom Products case? Plaintiff has asked for, and the Court of International Trade has partially ordered, an award of attorney's fees under the Equal Access to Justice Act (EAJA).

This case has a long and difficult history in the Court of International Trade and Court of Appeals for the Federal Circuit. I'm not going to do justice to the facts. Just understand that the company imported "white sauce," for which is obtained a tariff classification ruling from Customs and Border Protection in 1999. In 2009, via a "Notice of Action" (CF-29), Customs tried to change the classification in a way that resulted in a rate of duty increase of 2400%.

The request for fees relates to one of several ICP cases. This one involved 11 entries after the CF29 that CBP liquidated at the higher rate of duty. The CIT and later the Federal Circuit ruled for ICP, holding that CBP had not properly revoked or modified the prior ruling and that ICP had not materially misrepresented the nature of the merchandise.

Attorney's fees are available under the EAJA where a party prevails in a civil action against the United States for judicial review of an agency action to recoup fees and expenses. The exception is that is the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.

The U.S. position must have been justified both at the agency level and in litigation. Furthermore, the U.S. bears the burden of proving that its position was "clearly reasonable." That means it must have had a reasonable basis in both law and fact. This does not mean that the U.S. was unjustified when it is merely incorrect. Rather, the question is whether a reasonable person could think it correct.

Here, the Court found that ICP is entitled to EAJA fees. The Notice of Action was issued in contravention of a binding ruling and CBP was fully aware of this conflict. Evidence showed that CBP officials argued that the ruling must be revoked before the classification changed. Someone else at CBP opined, for whatever reason, that there was no time to go through the revocation process and that the rate advance was the best approach. The rush appears to have been due to pending criminal and civil penalty investigations related to this merchandise.

Customs and the Department of Justice also argued that the rate advance was justified because the facts on which the ruling was issued were fraudulently reported. According to Customs, and testimony in the trial from a knowledgeable party, the "white sauce" base was really a means of importing butter while avoiding dairy quotas. But, according to the Court, Customs made no clear determination of the principal use of the product and did not articulate a means of making that determination. As a result, it appears to me, the Court was unable to find the fraudulent misrepresentation.

Next, the government argued that the imported white sauce did not match the description provided in the ruling request. But, three CBP lab analyses found the merchandise to be consistent with the description provided in the ruling request. On appeal, Customs gave up on this line of argument.

Based on those facts, the Court of International Trade found that the government's position was not substantially justified. As a result, ICP is entitled to attorney's fees under EAJA. Statutorily, attorney's fees under EAJA are limted to $125 per hour unless the Court finds that it should be increased to reflect the cost of living or the limited availability of qualified counsel. Here, the Court agreed to a cost of living adjustment.

Regarding the availability of counsel, the Court approved an adjustment for time expended by specialized customs counsel. The theory is that the case required counsel with specialized knowledge of customs law and practice and that such lawyers are in short supply. The Court agreed that there is a relatively small cadre of customs attorneys. And, this case was particularly complex, vexing even CBP officials.

Thus, fees were assessed at a rate higher than the statutory $125 per hour. But, the government objected to some of the billing on the grounds that it "blocked" together multiple activities in one time entry. The government also objected to billing in quarter hour increments. Both of these requests were denied and fees assessed accordingly.

The government did succeed in its objection to fees for motions seeking injuntions and restraining orders over which the Court lacked jurisdiction.  Other items that were vague, possibly not related to the litigation, and duplicative were subject to a blanket 33% or 66% reduction.

Overall, this case has likely been a nightmare for ICP. It has also likely costs an enormous amount in legal fees to defend. I'm not sticking up for the plaintiff, which has at least been linked to what might be described as very aggressive tariff engineering. On the other hand, this all could have been avoided had CBP taken the appropriate steps to revoke the ruling. It is hard to see how that would have undercut the fraud case CBP was apparently trying to make. Customs encourages importers to get rulings and holds importers to the results. That is a two-way street. So, in these circumstances, I applaud ICP's counsel for this part of the case.